Home Capital moves to reassure markets

CEO says lender is on ‘sounder footing’ as uncertainty continues to cloud outlook

Home Capital Group Inc. may have survived its liquidity crisis, but the alternative mortgage lender says it is still facing a series of headwinds that are weighing on its outlook, including proposed regulatory changes to the mortgage market, reduced margins as a result of efforts to regain depositors and heightened scrutiny from its business partners.

On his first official day on the job, Yousry Bissada, the Torontobased company’s new president and chief executive, said Thursday the management team that handled the crisis has put the company on “sounder footing” and in the coming weeks he intends to meet with employees, brokers and other stakeholders to shape its strategy going forward.

“We still have a lot of hard work ahead of us, but it’s going to be a different kind of challenge,” Bissada said on a conference call to discuss Home Capital’s latest quarterly earnings. “We are in a position where we can look forward and make fresh decisions about the kind of company we want to be.”

Canada’s biggest non-bank lender reported a larger than expected $111.1 million net loss in the second quarter ended June 30 due to increased expenses from its liquidity woes, such as a $2-billion emergency credit line needed to backstop a partial run on its deposits.

Home Capital said in its quarterly report late Wednesday that issues which led to uncertainty about the firm as a going concern had been resolved and its liquidity and credit facilities were “sufficient to support ongoing business for the foreseeable future.”

“We have made a tremendous amount of progress in recent months,” said Bonita Then, its interim chief executive and board member. “The common theme here is building liquidity and building for the future ... Certainly challenges remain, but we are now well positioned to face them.”

Inflows of deposits, which help fund its mortgage lending, have returned to historical levels, particularly after renowned investor Warren Buffett came forward with a white-knight equity investment and a cheaper credit line (which Home Capital has since paid off ). Now, the company is able to work on returning its mortgage lending to a more normal level, it said.

Benjy Katchen, HGC’s executive vice-president of deposits and consumer lending, said the focus will be on Guaranteed Investment Certificates, whose lending terms can be matched with that of its mortgages.

After Buffett’s investment boost and higher rate premiums, deposits have started coming back, he told analysts. However, it is at rates between 50 and 100 basis points higher than Home Capital offered before its recent crisis, “eating into our margins on new business,” Katchen said. “Gradually, over the next several weeks we will adjust our rates ... reducing the rates we pay to be more in line with relevant competitors,” he said.

Jaeme Gloyn, an analyst with National Bank Financial, said uncertainty continues to cloud the company’s near-to-medium term outlook. “We continue to recommend investors await better visibility on macro risks ... as well as HCG’s deposit-gathering capabilities, profitability, growth, and credit performance,” he said in a note to clients on Wednesday.

Home Capital also said in its quarterly report it continues to expect elevated non-interest expenses due to “scrutiny from a wide range of stakeholders.”

The mortgage lender’s interim chief financial officer Robert Blowes said various stakeholders, from trade suppliers to brokers and oversight bodies, have been asking for “an extra look at us.”

“They’ve seen us get to a very, very difficult situation, which we’ve recovered from, I think, remarkably well,” Blowes told analysts. “So, that’s going to take a while until it settles down and get back to sort of normal trade.”

Meanwhile, Home Capital has beefed up its controls to prevent and detect misrepresentations of borrower information, such as the falsified income information on some loan applications that was discovered in its broker channel in 2014 that led to its liquidity crisis.

These improvements include technological investments in its platform to better and more quickly assess whether borrowers meet certain criteria, as well as changing incentives for underwriters from the volume of mortgages to the quality of the deals, Chris Whyte, Home Capital’s chief operating officer, told analysts.

Blowes said the firm has begun “rebuilding our mortgage pipeline” but cautioned that proposed regulatory changes that include a qualifying stress test for uninsured mortgages and a prohibition of colending or mortgage “bundling” could have a “material impact on our business strategy going forward.”

We are in a position where we can look forward and make fresh decisions about the kind of company we want to be. YOUSRY BISSADA, Home Capital Group president and CEO